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Competence co-development outsourcing

26 Comments · Business outsourcing

Companies often outsource business processes that have no clear match with potential vendor.

This scenario happens most often when the buyer is considering outsourcing a complex process, the boundaries of which are ambiguous or touch on the buyer’s core competence.

In such cases, the vendors who respond to the firm’s request for proposals (RFP) may not have competence directly in the buying firm’s area of need.

For instance, the responders may have competence in a peripheral business, but they respond to the RFP because they want to extend their portfolio of competencies.

When that occurs, the BPO buyer needs to look beyond the experience factor to make a reasonable judgment about the vendor’s capability to develop the needed competence.

Nevertheless, on occasion a buyer and vendor may engage in a BPO competence co-development strategy, in which each firm has an interest in developing the vendor’s expertise in the business process.

Sears faced such a challenge when, in the early 1990s, it was struggling with how to handle merchandise returns at more than 2,500 retail locations.

With more than 10,000 vendors providing products to the retail giant, the local stores were overwhelmed with the logistics of managing returns. Sears sent out an RFP to seek a vendor that would provide it with an efficient product returns system.

Unfortunately for Sears, none of the firms responding to its RFP had direct experience in handling returned merchandise.

Nevertheless, one firm, Genco Distribution Systems, Inc., of Pittsburgh, Pennsylvania, had related experience. At the time, Genco’s business competence was centered on transporting expired-date grocery items from retail store shelves and either disposing of them or distributing them to food banks.

Sears and Genco agreed to enter into a competence co-development outsourcing project, working closely together over time to extend Genco’s capacity in the process area needed by Sears.

Actually, Sears considered several firms that had such related competencies. However, Sears decided to work with Genco because of the latter’s interest in a co-development approach in which both sides assumed some risk.

The value of developing a deep partnering relationship between buyer and vendor in process competence co-development is apparent in the deal struck by Sears and Genco.

To develop the necessary competencies, Genco worked with Sears and its vendors from the outset.

The two firms worked together to map process flows, gather data on each supplier’s return preferences and requirements, and develop a solution that would be able to handle the large volume of returns.

Today, Genco’s custom R-Log software tracks several variables associated with each returned item. Data tracked include which store the product came from, the proprietary Sears item number, the stock-keeping unit (SKU) number, and the price Sears paid for the item. The SKU number identifies other attributes as well, such as the name of the supplier.

At Sears, most returns go back to suppliers. However, other potential paths include online auctions, discounters, resale next year, recycle, donate, or destroy.

Decisions about which path to follow are made at Genco-run return centers in Sacramento, California; Columbus, Ohio; or Atlanta, Georgia. Genco’s R-Log compares data an incoming returns against a database that tells how to route the hundreds of thousands at products Sears sells, including clothing, appliances, electronics, tools, toys, can parts, and home decor.

For instance, apparel maker OshKosh B’Gosh wants all returned merchandise back and then gives Sears full credit ton it. OshKosh does not allow Sears to sell its products to secondary markets.

In contrast, private-label clothing made for Sears can often be sold overseas at a discount, with the label ripped out.

And products such as gardening supplies can be stoned and resold the next year.
With the operational infrastructure expanded to handle not only Sears but others at its franchises as well, Sears and Genco teamed up to find additional ways to leverage the systems they had developed together.

They now work together in managing an extensive recycling program. For example, plastic hangers are not accepted in landfills in many areas because of environmental concerns.

Sears and Genco decided to recycle more than 100 million hangers each year, converting what had been an expense into a revenue stream. The two firms are also leveraging the Internet as a means of liquidating returned merchandise, including exploring B2C auction strategies.

Clay Valstad, director of central return center operations for Sears, said, “Our reverse logistics strategy is to take the work, square footage, and expense out of returns for our stores by consolidating and handling returns off-site. . . .

This allows our stores to focus on taking care of our customers.” Valstad said, “In addition to recovering significant dollars in vendor credits or through recycling, we are able to recover all at the costs at running our reverse logistics program.”

In this outsourcing scenario Sears was motivated to find a solution even though no existing vendor matched its needs exactly. The current era of B2B services has opened up a new type at partnering option.

Going beyond joint venturing, a business process co-development strategy leverages the competencies of both firms with the goal at improving operating efficiencies on the one hand, and extending the service portfolio on the other.

Each side wins and no heavy negotiations about equity stake or profit distributions are needed. The competency co-development strategy allows both firms to focus on their core competence and to be rewarded for high performance.


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